Major banks trade with each other

When retail traders look at a currency pair on their screen, they are seeing the tip of a massive iceberg. Beneath the surface lies the interbank market, a decentralized network where the world’s largest commercial and investment banks trade currencies directly with one another. This is not a public exchange like the New York Stock Exchange. It is a club of institutional giants—Deutsche Bank, JPMorgan Chase, UBS, Citigroup, and about a dozen others—that collectively dictate the price, spread, and liquidity of every currency pair you trade. Understanding the structure of this tier is essential for any forex trader who wants to move beyond guesswork and into informed decision-making.

The interbank market is the ultimate source of liquidity. Retail brokers, hedge funds, and corporations all eventually route their order flow to this core. But how do the major banks actually trade among themselves? The process is largely brokered through electronic trading platforms such as EBS (Electronic Broking System) and Reuters Dealing. These platforms operate as central limit order books where banks post bid and ask prices for specific currency pairs, typically in standard lots of one million units of the base currency. Because the participants are large and the stakes are high, the spreads in the interbank market are razor-thin—often just a fraction of a pip for major pairs like EUR/USD or USD/JPY.

The key structural feature here is the tiered hierarchy of access. Not every bank can trade directly with every other bank. At the top are the prime banks, which have the largest balance sheets, the most sophisticated risk management systems, and the deepest relationships. These banks trade with each other on a credit basis, meaning they extend bilateral credit lines. If Bank A wants to trade with Bank B, it must have an established credit arrangement that allows it to take on counterparty risk. This credit system introduces a crucial dynamic: the more credit lines a bank has, the more liquidity it can access and the tighter the quotes it can offer to its clients. A bank with fewer credit lines is effectively a second-class citizen in the interbank club, forced to trade through intermediaries and pay wider spreads.

Liquidity in this market is not a static resource. It ebbs and flows according to time zones, economic data releases, and shifts in global risk sentiment. During the London-New York overlap, for example, liquidity is at its peak because the largest banks in both hubs are active simultaneously. Conversely, during the Asian session, volume thins out, and spreads widen. But the real secret that separates advanced traders from novices is understanding how liquidity concentration works within the interbank structure. Major banks do not treat all currency pairs equally. The vast majority of interbank volume is concentrated in the G-10 currencies—EUR, USD, JPY, GBP, CHF, CAD, AUD, NZD, SEK, and NOK. Exotic pairs like USD/TRY or USD/BRL have much lower interbank participation, meaning their liquidity is shallow and their prices are more prone to violent swings.

Another critical point is that the interbank market is not a single, uniform pool. It is fragmented across multiple venues and communication protocols. While EBS dominates in EUR/USD, USD/JPY, and CHF pairs, Reuters is stronger in sterling, Australian dollar, and Scandinavian pairs. This fragmentation means that a bank can simultaneously trade the same pair on two different platforms and receive different prices, though high-frequency algorithms and arbitrage bots quickly correct discrepancies. For the retail trader, this fragmentation explains why price feeds from different brokers can show slight variations—they are pulling from different segments of the interbank mosaic.

The role of the dealing desk adds another layer of structural nuance. Some major banks still maintain voice brokers who facilitate large trades over the phone, especially for illiquid crosses or when a block of currency needs to be moved without alarming the electronic market. These voice brokers act as matchmakers, finding a buyer or a seller for a particular size and price. In moments of extreme volatility, such as during a surprise central bank announcement, the electronic platforms can freeze or widen spreads to the point where only voice brokering keeps the market functional. This is the ultimate safety valve in the interbank structure.

For the aspiring trader, the practical takeaway is this: the interbank market is where true price discovery happens. The quotes you see on your retail platform are synthetically derived from the interbank stream, often with a markup added by your broker. When you place a trade, you are not directly transacting in the interbank market; your broker is hedging your position, either by offsetting it internally with other clients or by passing it upstream to a prime broker. Your success depends on understanding that the liquidity you rely on is created by the credit relationships and trading strategies of a handful of global banks. When those banks pull back—as they did during the Swiss National Bank’s removal of the EUR/CHF floor in 2015—liquidity evaporates instantly, and retail traders get hurt.

In summary, the interbank market is the engine room of forex. It is a credit-based, fragmented, tiered system where the biggest banks set the tone and the spreads. If you want to trade with any edge, you must respect its structure. Watch the liquidity cycles, know which pairs have deep interbank participation, and always ask yourself: who is on the other side of my trade? The answer is almost always a major bank trading with another major bank, and they are not there to lose money.